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It is important to understand that options price is governed by three main components.

1) The underlying Security (Stock, ETF)

2) Time

3) Volatility

General Options Trading Strategy

My core strategy is to act like an insurance company by selling premiums. This allows me to create high probability setups and create consistent income. This is completely opposite to directional trading or speculation. It’s a very mathematical and mechanical based trading strategy.

Since we cannot tell which way the underlying security would move in most of the time (we could try by using technique such as Trade Apgar Test but the probability to get it right would still be only marginally better than 50%, maybe 60% if every single indicator is aligned with the direction of your choosing based on my experience), I realized it was more consistent to set up trades with winning probability of 70% and up.

One downside to this “insurance company” like trading style is it needs a high volatility environment. Obviously, everyone only wants to buy insurance when the market is crazy.

This is why occasionally, I would be forced into doing directional trade, especially in low volatility environment.

I cannot stressed enough it is crucial to have a list of strategies based on the volatility level because using the wrong strategy could substantially decrease the winning ratio and make you get in trouble.

VIX Exchange Traded Products (ETPs)

Primarily trading VXX (VXXB) and UVXY.

 

High Volatility Strategies

High IV Strategy >>

Low Volatility Strategies

Low IV Strategy >>